01/08/2014

The global 2014 economy: Everybody still in recovery mode. Pass the Advil

It's that time of year again. Time for economic soothsayers to predict where you should invest all that cash you have kept hidden in your mattress.

Most economists agree 2014 will not see any spectacular meltdowns or milestones. Most countries are still in recovery mode after the 2008 global market crash. Call it the world's longest hangover. The developed world is aging and the economies of the U.S., Japan, Europe and the U.K. are all fighting over that one bottle of Advil that can lead to growth and recovery.

Keeping that in mind, I spoke with Jack Ablin, the chief investment officer of BMO Private Bank, in chilly Chicago.

"I think a lot of this year will be more of the same. But the big variable will be the U.S. Federal Reserve moving offstage and what that means for interest rates and asset values and is this a void now that some other central bank will try to come in and fill?"

The Federal Reserve's move to start backing away from the influence it has had in the last five years since the market collapse should not cause large market ripples. In the U.S., the economic growth rate appears to be accelerating and that should allow stocks and other risk investments to sustain value, even in the face of higher interest rates, Ablin says.

Janet Yellen, the first woman to lead the Fed, is a believer in forward guidance, he adds. "What she is hoping to do is provide clarity, not just to investors but to business risk takers and give them a sense of what the Fed is likely to do, or not do, against the backdrop of the economy. By offering guidance that should encourage investors to take the risk," he says.

While emerging markets fell more than 2 per cent in 2013, there are some bright lights. Ablin points to the satellite countries of Eastern Europe such as Poland, that is a member of the EU and sells into the euro zone but has kept its own currency, the zloty.

Just like "this polar vortex," notes Ablin, goods from countries like Poland could start flying into the rest of Europe.

But the European Union will continue to have some challenges this year - all of which could come to a head in May during the European Parliamentary elections. There are some reports that right wing parties could take as many as 90 of the 751 seats up for grabs this spring, making them strong enough to form an official parliamentary group.

The north-south European financial divide remains. And policy intervention in the EU, such as failed austerity plans, have yielded tepid and sometimes disastrous results. That has led to a rising anti-EU backlash in Greece, Italy, France, the United Kingdom and Hungary.

"Many of these countries that are under the weight of austerity are blaming their wealthy neighbours for the situation they are in ... it is more of an easy excuse than recognition many imbalances came from within their own countries," he says.

Europe has been caught in a "colossal debt binge" and it is still trying to find solid footing, Ablin points out. In fact, the European Commission is expecting just 1.1 per cent growth in 2014 with unemployment staying above 12 per cent.

So, what should you do with that money under your mattress?

In short, there is no magic formula but this age old advice works: Buy low and sell high.

Tanya Talaga is the Star's global economics reporter. Follow her on Twitter @tanyatalaga

Posted by Tanya Talaga at 09:22:47 AM

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